Understanding APR vs Interest Rate: What Really Costs You More?
Learn the crucial difference between APR and interest rate when comparing loans in the UK. Discover how to calculate true borrowing costs, avoid hidden fees, and make smarter financial decisions in 2025.
APR includes all costs of borrowing, making it the best way to compare loans. Interest rate alone can be misleading.
| Feature | Interest Rate | APR |
|---|---|---|
| Includes fees | No | Yes |
| Best for comparing | No | Yes |
| Legally required | No | Yes |
Compare APRs
Frequently Asked Questions
What's the difference between APR and interest rate?
Interest rate is the percentage charged on the amount you borrow. APR (Annual Percentage Rate) includes the interest rate plus all mandatory fees (arrangement fees, booking fees, etc.), giving you the true total cost of borrowing. Always compare APRs, not just interest rates, when choosing a loan.
Why is APR higher than the interest rate?
APR is higher because it includes all mandatory fees in addition to the interest rate. For example, a loan with a 5% interest rate and a £999 arrangement fee might have an APR of 9.9%. The APR gives you the true cost of borrowing, while the interest rate only shows part of the picture.
What is representative APR?
Representative APR is the rate that at least 51% of successful applicants receive. This means up to 49% of approved borrowers may be offered a higher rate based on their credit score and circumstances. Your personal APR may be higher than the representative APR advertised.
Should I choose a loan with a lower interest rate or lower APR?
Always choose the loan with the lower APR, as this represents the true total cost including all fees. A loan with a 5% interest rate and high fees (9.9% APR) costs more than a loan with a 7% interest rate and no fees (7% APR). APR is the most accurate comparison tool.
Does APR include early repayment charges?
No, APR doesn't include early repayment charges, late payment fees, or optional insurance. APR assumes you'll keep the loan for its full term and make all payments on time. If you plan to repay early, check the early repayment charges separately as they can significantly increase your cost.